Greening Distribution with Industrial Infills

Greening Distribution with Industrial Infills

Steven E. Campbell is a senior vice president and director of environmental and development services for the AMB Property Corporation, based in San Francisco. Earlier this summer, AMB completed a project that helped a California city move a step closer to its goal of greening its community. The project involved an industrial infill. Urban areas that have a desire to grow, but no space to do it, are increasingly turning to former traditional industrial properties to create a place for smarter, more environmentally conscious enterprises that are near population centers and transportation hubs. Steve Campbell tells us how this strategy is being applied to distribution centers.

Leslie Guevarra: Steve, thank you for joining us today to talk about this topic and for offering AMB's perspective.

Steve Campbell: You're welcome. It's a pleasure to be on the call.

LG: Would you tell us what you're seeing in this arena — how it's grown and how it's changed?

SC: Increasingly we're seeing our customers start to look at ways that they can improve their operational efficiency. One of the biggest costs in the distribution and supply chain is related to energy costs and fuel. With prices heading where they are and have been, it's severely impacted the operational efficiency and profits of the supply chain. We're seeing our customers start to appreciate, in a way they historically have not, infill distribution from locations that actually move them closer to their customers and shorten their transit time.

LG: You're saying that wasn't always the case. What were the motivations before?

SC: I think before there was — when energy costs were less — there was a movement more towards centralized mega DCs. Larger distribution centers were being pushed outside of metropolitan areas. What in those cases was happening was goods were coming in through major ports of entry into ports, for example, and then being shipped outside of the consuming metropolitan area to large distribution centers, where they would then be separated, broken down and brought back in to the point of consumption.

When energy costs were low — back in $20 or $30 a barrel oil — that was a much more sensible approach to distribution. Now at $125 to $150 a barrel, things have changed and energy is such a huge percentage of the total distribution costs that our customers have largely stopped building large singular distribution centers and are re-evaluating their entire supply chain, so that they have the ability to carry more inventory in infill sites that are closer to their customers.

LG: We're talking not only closer to their customers, but closer to the ultimate locations for their products, correct?

SC: That's correct. If I can compare what we're starting to see happen here in North America to what historically's taken place in Asia, there's a real parallel. Distribution in Japan for example, where AMB's been very active in development, largely happens from infill locations that are located strategically within the highest density metropolitan areas, like Tokyo and Osaka. What it allows our customers to do is have a much quicker transit time.

They don't have to experience the congestion that they would were they to be doing distribution from outside those markets back into it. The current supply chain model in North America is largely inverted. It's very different than that: Distribution for some of the larger users, retailers and our customer base happens from outside of major metropolitan areas back in. So we're seeing a real shift back to what has been our core strategy all along — that is to buy real estate, industrial real estate, at locations that are infill closer to the customer.

LG: Now, would you also layer into this the concern that developers have for having greener construction and greener buildings? Would that drive infills?

SC: It's a huge driver. And, in fact, the whole sort of awareness, growing awareness and value being placed on sustainable development really points to this because historically the environmental costs, the impact associated with long transit times, have not been accounted for. Things are changing now as communities start to look critically at how things are done within their reaches and how distribution is done in and around major metropolitan areas.

In the master plans, ports and airports and other points of embarcations and distribution are starting to have to look at the overall regional impacts associated with transportation. If you peel back all the layers on this and start to look at transportation costs and the environmental side of that, there's a huge premium that will be placed on industrial infill and distribution done from those locations that can cut down on the total energy cost and the wear and tear on infrastructure.

LG: Now all those things sound like plusses could you give us a very quick thumbnail SWOT on what you're seeing?

SC: Well, it's starting to get velocity. Our portfolio remains highly occupied. Those of our peers that have a higher percentage waiting for distribution space that is outside a metropolitan area, they're suffering increased vacancy as economic conditions change and energy costs go up. There's a very clear response by our customer base to want to become more efficient.

Our business model, and the model of those who focus on infill distribution, is to help our customers be the most efficient they possibly can and that goes hand in hand with being greener. There's a premium that's being placed on locating distribution, storage and distribution, so that it's infill and has a lower energy component attached to it than the outlying-distribution model that's really evolved over the last 15 years allows for.

LG: Are there challenges or education that needs to be done in communities as to what the benefits may be to this type of a strategy— especially if you're talking about bringing in a type of industry that may not have existed in those communities recently?

SC: It's huge, in fact, as I spend — and my team spends — a lot of time on this topic with various industry groups and communities because it's the opposite of what they historically have wanted. If you look at an urban infill area, what they tried to do certainly over the last 10 to 15 years is move industrial out. There's been a push to have higher value retail, commercial retail uses of those properties.

For us to have this strategy become a component of urban infill areas, we have to re-educate the planners and the users so that they start to look at the other factors, which are now, as I said earlier, starting to get focused in regional planning, the transportation side, and look at that as an offset, a favorable offset, to this concept that communities and planners had for quite some time that pushed distribution outside of metropolitan areas: It's one of congestion.

If you can move the trucks back in, so that they have a shorter haul to the point of consumption, then that's good for everybody. It cuts energy costs. It's better for the environment, and ultimately it's a more favorable use of infill structure for communities. We've spent a lot of time, as have others, working to re-educate the political and planning side in these communities. And we're working aggressively with ports and airports, so that they're better armed with the facts surrounding distribution and can do a better job advocating for a higher density distribution use in areas more approximate to their facilities.

LG: Talk to us for a moment about scalability. AMB is a global firm. Tell us how an industrial infill strategy might be pursued on a range of scales.

SC: Well, scalability's a big one and what we discovered through our work in Asia is the way you really make this viable is to increase coverage. Increasing coverage means you have to go vertical. The concept of vertical multistory distribution is one that is widely accepted in Japan, in Singapore and increasingly in China, but is largely unheard of outside of those markets.

What we've been doing, having developed a lot of that in Japan and in Singapore, we've been bringing those examples back into North America so that people can see what multistory distribution looks like. To give you some perspective, these are often four- to six-story buildings with circular truck ramps that allow full access for full-size, container-carrying trucks to every single floor. You end up with coverage ratios approaching 200 percent on the land parcel.

The way that makes sense is you have to place a higher premium, a higher land value, on infill industrial and to do that you have to overcome all the emotional impediments that we talked about: That is educate the communities that what they really want is distribution to be closer to them and not pushed out the way historically it has been done.

LG: Is there a happy medium in there?

SC: You know the happy medium is exactly what we've described and that is to create a distribution infill structure that has a lower impact on everybody. The way to do that is, we believe, to increase the density and bring it closer to the point of consumption. If you look at these buildings — and I welcome anybody who's interested to have a look on our website, there's some great examples of the multistory products that we built in Asia — you'll quickly see these are beautiful high-tech buildings designed with all the latest sustainable features that are intended to be attributes to communities.

They're very different than kind of the historic perception people have of industrial distribution, which are single-story, tilt-up, sprawling warehouse complexes. These are state-of-the-art buildings that are actually very attractive and designed to move trucks efficiently off roadways and be loaded and back into communities, so that distribution's done in a manner that has a lower degree of impact than the current model allows for.

LG: Would you share a few best practices?

SC: On the sustainable side, we've done a lot to optimize energy designs surrounding these buildings. Probably one of the biggest practices that we've experienced a lot of return for the investment on is on high-efficiency lighting, optimizing the use of natural lighting, minimizing water use and using recycled building materials, so we end up with buildings that have the lowest impact and the highest recognized score to use the North American equivalent: We seek to really optimize the integration of LEED. It's an efficiency thing. The best practice side of sustainability in our experience is one that makes our customers more efficient and they're operating model more profitable. We've done a lot in doing work to minimize energy use. We're working aggressively towards the implementation of some renewable energy strategies here in North America and globally, more for the benefit of our customers, but in the long-term name of achieving a sustainable development platform.

LG: What should people keep in mind regarding industrial infills?

SC: I think the most important thing to keep in mind is an open mind. There is a lot to be said for doing things differently. We view rising energy costs as having a very favorable side effect: It's driven all of us towards examining our practices in what we can do to be more sustainable in how we operate. I think that the movement towards greener distribution is one that will cause people to look more open-mindedly at the industrial infill. It touches on so many components of the total cost.

In anticipation of this call I had done a little bit of research, just looking at this concept of what transportation is really costing right now. The best (statistic) that I saw was at $150 barrel of oil, which is what we were at a couple of weeks ago, it adds 11 percent to the total cost of distribution. Right now, every dollar increase in the price of oil is adding about a one percent increase to total transportation costs.

If you look at that economic impact and take that out of your operating model, it causes you to really want to reduce transit time, which environmentally is a great thing.,So I would say open-minded evaluation of industrial infill, and the benefits to everyone, is something that I would really encourage planners and politicians to do.
LG: What's on the horizon for industrial infills?

SC: We think it's where it's headed. Even as energy costs fall, we think the point's been made. That is that operationally, the distribution community — those who are involved in providing both the space and actually involved in the logistics business — are going to be driven in closer to the ports and airports that serve major metropolitan areas. The trend is in that direction.

We've believed for a long time that's where it is, which is why we focus our investment strategy historically on industrial infill. That's being borne out by what we're seeing our customers do. There was a really interesting study that just came out. It was a survey of 800 different manufacturing and retailers done by EyeforTransport, and they were asking people what the impact of rising fuel prices on their logistics in business is.

The conclusion that came out of that was obvious on one hand — and that is it's really impacted people from a profitability standpoint — but it has virtually stopped the construction of outlying distribution master mega DCs. The construction of those has virtually stopped in North America. There's a wholesale re-evaluation being done by the big players, such as Wal-Mart, as to how they're going to handle their supply chain. They're looking at smaller DCs that are located closer in, in infill areas, so that they can be more efficient in how they serve their customers.

The second thing that they're doing, which I think is a real surprise in the world of just-in-time inventory management, is a lot of the big players are admitting that they're starting to evaluate the benefits of longer storage time. They want to increase the square footage of storage they have, so that as energy costs fluctuate and their consumer demands change, they have the ability to manage their supply chain in a more efficient manner — as opposed to how it historically has been done, which is this move and trend towards just-in-time efficiency.